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BHEL: Slow execution takes a toll - Views on News from Equitymaster
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BHEL: Slow execution takes a toll
Aug 13, 2014

BHEL has announced first quarter results for the financial year 2014-2015. The company has reported 20% YoY decline in sales. Profit after tax dropped by 58% YoY. Here is our analysis of the results.

Performance summary
  • Net sales for the company declined by 20% YoY in 1QFY15.
  • Revenues from both power and industry segments declined 23% YoY and 12% YoY respectively.
  • Operating profits declined by 44% YoY during the quarter.
  • EBITDA margin for the company fell down to 4.2% in 1QFY15 vs. 6% in 1QFY14.
  • Net profit for the quarter dropped 58% YoY.
  • The company ended the quarter with an order book of Rs 974 bn.

Financial performance: A snapshot
(Rs m) 1QFY14 1QFY15 Change
Sales 63,526 50,676 -20.2%
Other operating income 1,056 874 -17.2%
Expenditure 60,695 49,371 -18.7%
Operating profit (EBDITA) 3,886 2,179 -43.9%
Operating profit margin (%) 6.0% 4.2%  
Other income 5,385 3,478 -35.4%
Interest 278 473 70.3%
Depreciation 2,308 2,725 18.1%
Profit before tax 6,685 2,459 -63.2%
Tax 2,031 524 -74.2%
Profit after tax/(loss) 4,654 1,935 -58.4%
Net profit margin (%) 7.2% 3.8%  
No. of shares   2,448  
Basic & Diluted earnings per share (Rs)*   13.0  
P/E ratio (x)*   16.0  
* On a trailing 12-months basis

What has driven performance in 1QFY15?
  • BHEL has been facing hurdles on the execution front. In few projects, customers have not released payments for the earlier work and therefore the company is not able to go ahead with further execution of the projects. There are also instances in which getting the clearances for few projects have been delayed. As in the recent past, all these factors have impacted the sales of the company during the quarter too.

  • The company saw a significant fall in raw material costs during the quarter, from 57.2% of sales in 1QFY14 to 51.2% of sales in 1QFY15. However, this was more than offset by a big increase in staff costs, both in absolute terms and as a percentage of sales. This led to the decline in operating margins during the quarter.

  • The fall in operating margins along with a spike in interest costs and depreciation charges is what led to the bottom line falling by 58% YoY during the quarter.

    Segment-wise performance
    (Rs m) 1QFY14 1QFY15 Change
    Power
    Revenue 53,786 41,442 -23.0%
    % share  81% 79%  
    PBIT margin 14.1% 12.7%  
    Industry
    Revenue 12,926 11,331 -12.3%
    % share 19% 21%  
    PBIT margin 10.1% 3.5%  
    Gross Total*      
    Revenue 66,712 52,772 -20.9%
    PBIT margin 13.3% 10.7%  
    * Excluding inter-segment adjustments & Excise Duty
What to expect?
BHEL has suffered on account of slow moving orders. However, the company says that it is seeing initial signs of rebuilding of confidence among businesses and industry, and feels that the prospects of revival of economy have improved. Further, it has indicated that overall sentiment in power sector is turning positive, more so with steps taken in the recent Union budget like boosting transmission and distribution infrastructure and separation of agricultural feeders, allocations for solar power capacity generation etc.

BHEL is currently favorably placed for about 4,000 MW of thermal and hydro power orders, though none could get finalized during the quarter. It expects about 15,000 - 17,000 MW of power plant orders to get finalized during FY15, and is therefore optimistic of regaining growth momentum over the medium term.

More so, the management is optimistic of execution pace picking up for the rest of the year, especially in slow moving projects. It is currently also trying to accelerate even those projects that are already on schedule by asking customers to facilitate early provision of requirements from their side.

At the current price of Rs 209, the stock is trading at a P/E multiple of 8.7 times our estimated FY17 earnings. Considering cheap valuation, we believe the negatives are priced in to an extent and maintain our Buy view on the stock.

However, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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